Regulatory Acts

The Principles for financial market infrastructures (PFMI) are the international standards aimed at ensuring that the infrastructure supporting financial markets is robust enough to withstand financial or operational shocks. This set of principles was issued by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) in 2012 and is considered one of the key standards for sound financial systems, along with the Basel Core Principles and the Insurance Core Principles, that the international community considers essential to strengthening and preserving financial stability. The principles apply to all systemically important financial market infrastructures (FMIs), such as: • payment systems (PS) –sets of instruments, procedures and rules for the transfer of funds between or among participants that include the participants and the entities operating the systems • central securities depositories (CSDs) – providers of securities accounts, central safekeeping services and asset services that may include the administration of corporate actions and redemptions • securities settlements systems (SSS) – systems that enable the transfer and settlement of securities by book entry according to a set of predetermined multilateral rules • central counterparties (CCPs) – parties that interpose themselves between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts • trade repositories (TRs) – entities that maintain centralised electronic records of transaction data The 24 principles in the PFMI are grouped into nine themes. Most of the principles are applicable to all types of FMI. However, as shown in the table, some principles are only relevant to specific types of FMI. Themes Principles (applicability) Short description General organisation Principle 1: Legal basis (all) Principle 2: Governance (all) Principle 3: Framework for the comprehensive management of risks (all) FMIs should have a well founded, clear, transparent and enforceable legal basis for each material aspect of their activities. FMIs should have governance arrangements that are clear and transparent, promote safety and efficiency and support the stability of the broader financial system. FMIs should have a sound framework for comprehensively managing legal, credit, liquidity, operational and other risks. Credit and liquidity risk management Principle 4: Credit risk (PS, SSS and CCPs) Principle 5: Collateral (PS, SSS and CCPs) FMIs should effectively measure, monitor and manage their credit exposures. FMIs should maintain sufficient financial resources to cover their credit exposure to each participant fully. CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios. FMIs that require collateral to manage their or their participants’ credit exposures should accept collateral with low credit, liquidity 2/3 Principle 6: Margin (CCPs) Principle 7: Liquidity risk (PS, SSS and CCPs) and market risks, as well as set appropriately conservative haircuts and concentration limits. CCPs should cover their credit exposures to their participants for all products through an effective margin system that is risk-based and regularly reviewed. FMIs should effectively measure, monitor and manage their liquidity risk. FMIs should maintain sufficient liquid resources in all relevant currencies to effect same-day, and where appropriate, intra-day and multi-day settlement of payment obligations under a wide range of potential stress scenarios. Settlement Principle 8: Settlement finality (PS, SSS and CCPs) Principle 9: Money settlements (PS, SSS and CCPs) Principle 10: Physical deliveries (CSDs, SSS and CCPs) FMIs should provide clear and certain final settlement, at a minimum by the end of the value day and, where necessary, intraday or in real time. FMIs should conduct their money settlements in central bank money where practical and available. Otherwise, they should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money. FMIs should clearly state their obligations with respect to the delivery of physical instruments or commodities and should identify, monitor and manage the risks associated with such physical deliveries. Central securities depositories and exchange-ofvalue settlement systems Principle 11: Central securities depositories (CSDs) Principle 12: Exchange-ofvalue settlement systems (PS, SSS and CCPs) CSDs should have appropriate rules and procedures to help ensure the integrity of securities issues and minimise and manage the risks associated with the safekeeping and transfer of securities. FMIs that settle transactions that involve two linked obligations should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other. Default management Principle 13: Participantdefault rules and procedures (PS, CSDs, SSS and CCPs) Principle 14: Segregation and portability (CCPs) FMIs should have effective and clearly defined rules and procedures for managing a participant default that would allow them to take timely action to contain losses and liquidity pressures and continue to meet their obligations. CCPs should have rules and procedures that enable the segregation and portability of positions of a participant’s customers and the collateral provided to CCPs with respect to those positions. General business and operational risk management Principle 15: General business risk (all) Principle 16: Custody and investment risk (PS, CSDs, SSS and CCPs) Principle 17: Operational risk (all) FMIs should identify, monitor and manage their general business risk. FMIs should hold sufficient liquid net assets funded by equity to cover potential general business losses so that they can continue their operations and services as a going concern if those losses materialise. FMIs should safeguard their own and their participants’ assets and minimise the risk of loss on and delay in access to these assets. FMIs should identify all possible sources of operational risk and mitigate them through appropriate systems, policies, procedures and controls. Their business continuity management should aim 3/3 The PFMI also require that FMIs be subject to appropriate and effective regulation, supervision and oversight by a central bank, market regulator or other relevant authority. In this context, central banks, market regulators and other relevant authorities should: • have the powers and resources to carry out their responsibilities in regulating, supervising and overseeing FMIs effectively • clearly define and disclose their regulatory, supervisory and oversight policies with respect to FMIs • adopt the PFMI and apply them consistently • cooperate with each other, both domestically and internationally, as appropriate, in promoting the safety and efficiency of FMIs This Executive Summary and related tutorials are also available in FSI Connect, the online learning tool of the Bank for International Settlements.